Infosys stock could be dead money for investors for some time: CLSA

NEW DELHI: The pain for Infosys may not be over as it is hard to find any positive from the March quarter earnings. The key hurdle for Infosys is not the poor set of results, but the massive downgrade reset of margins which will weigh on future earnings, CLSA said in a note on Friday.

Asia Pacific-focused broker CLSA has retained 'outperform' rating on the stock, but cautions that the stock could be 'dead money' for quite some time. The global brokerage firm has slashed its 12-month target price from Rs 3100 earlier to Rs 2650 post the results.

"The Infosys stock may very well remain subdued for some time until it shows consistency in financial performance in the coming quarters," said the CLSA note. Infosys margins have fallen by almost 700 bps in the last six quarters and look unlikely to turn anytime soon. In the March quarter, Infosys EBIT margins were down 213 bps QoQ as onsite wage hike, price decline and Lodestone cost amortisation weighed on results.

CLSA find it more of a company specific issue while the sector outlook still remains upbeat. The BSE IT sector outperformed benchmark indices in the January-March quarter, driven by positive commentary from NASSCOM.

The BSE IT index surged over 20 per cent in the Jan-March 31 period, while Infosys managed to gain nearly 25 per cent in the same period ahead of its results. But after a steep cut on Friday, Infosys erased all its gains made in the calendar year 2013 and is down nearly 1 per cent so far in the year 2013, as of data collected on April 12.

Infosys surprised the street with poor and volatile topline trend. Inability of the Infosys management to give fair visibility on the business is not something that will help investor sentiment.

Given its B2B business, reliance on company commentary remains high and such variations from own guidance multiple times reflects very poorly on the management, said the brokerage firm.

Infosys valuations compared to its peers were largely driven by its financials in the past. However, Infosys' inconsistency over the last 18 months and another big miss in the March 2013 quarter are forcing a re-look, CLSA said.

Post results, Infosys stocks are trading in a decent valuation zone, and the stock up-move from here on needs to be backed by at least 2-3 quarters of consistent growth.

"We had upgraded Infosys on the belief that revenue momentum will back with the industry demand on a come-back as well as Infosys' own aggression," CLSA said. However, March 2013 results and FY14 guidance seem to have put big spikes in our assumptions, the note added.